Mobile

Why Your Smartphone Will Replace Your Wallet

The day when near field communication (NFC) will help replace plastic credit cards, coupons and loyalty program cards with a wave of a phone at a payment terminal has been long anticipated.

Wireless NFC technology enables devices, including mobile phones and payment terminals, to communicate with one another or read special tags. Its short-range signal, convenience and built-in security make NFC an apt choice for mobile payments. Its efficacy persuaded companies like MasterCard, American Express, and Visa to join the NFC Forum in 2004 shortly after it was founded to advance the use of the technology. Today, the possibility that this technology could replace a wallet full of plastic seems not only likely, but imminent.

Samsung's Nexus S, the first NFC-enabled Android phone, will be on sale at Best Buy starting December 16; Nokia has announced that all of its Smartphones starting in 2011 will support NFC; and Apple recently hired an NFC expert. Jeff Miles, the director of mobile transactions worldwide at NXP Semiconductors, which co-invented NFC with Sony in 2002, says he expects more than 70 million NFC-capable handsets to be manufactured in 2011.

“As far as what will happen with it, who owns the keys and all of that, none of that has really been determined," Miles says.

Players in multiple industries have made strides toward putting virtual wallets on consumers' mobile phones. Here's how some of them have been approaching the opportunity to transform the way we make purchases.

Credit Card Companies

Contactless payment terminals for MasterCard’s PayPass, American Express's ExpressPay and Visa’s payWave could also be used to accept the tap of an NFC-enabled phone for payment. In essence, the terminals, which are installed in all U.S. McDonald's, CVS Pharmacies, Home Depots and other merchant locations, are the beginning of a "tap-to-pay" infrastructure.

MasterCard, for instance, is now accepted on about 265,000 contactless payment terminals that would also be able to accept an NFC-enabled phone. Considering that the company has about 29 million locations worldwide, this is far from a complete infrastructure. But it’s a start.

“Definitely we’re seeing a lot of interest and support, and I think 2011 is really going to be a year when we really start seeing commercial deployment,” says James Anderson, head of mobile for the company.

Although NFC-enabled devices have been available in various markets for quite some time, with the exception of a handful of pilot projects, they haven't been used for payment. In order to safely use the technology with checkout terminals, a "secure component" also needs to be either embedded in the phone, in a SIM card, or through MicroSD cards.

In the meantime, credit card companies have started programs to get customers used to the idea of tapping their phones to pay. MasterCard customers that bank with Citibank, for example, can ask for a mobile PayPass tag to attach to their phone to enable tap-and-pay. The adhesive chips use the same NFC technology that would be embedded in some phones.

Mobile Network Providers

Last month, an unlikely partnership of Verizon, AT&T and T-Mobile announced a new initiative called Isis that will create an NFC contactless payment network for the three companies' combined 230 million customers. Ryan Hughes, the VP of business development at Verizon Wireless and an Isis spokesperson, sees the joint venture as a signal to merchants that they are committed to mobile payments.

“[Our announcement] was actually an opportunity for us to say to the merchant community that this is happening; it’s going to be real, this is not a science project for us, and we have the opportunity on our side to put the technology in a lot of consumers' hands, and it’s a rallying cry for banks and merchants that the time has come,” Hughes says.

Because the companies are working together on the payment network, merchants will only need to update their terminals once in order to provide service to all three mobile networks' customers.

Barclay's "Barclaycard U.S." will be the first card on Isis’s planned network, although Isis says that it will welcome other banks and mobile carriers that want to join in the future. Isis is planning to use Discover’s own payment network and its existing terminals that accept Discover’s Zip contactless payment cards. When it launched in November, Isis was expecting to launch a product within 18 months.

MasterCard and other credit card companies have created similar partnerships with mobile networks outside of the U.S. Mobile carriers have large customer bases and relationships with handset manufacturers to make sure that NFC technology is included in new handsets and to create a common set of technology standards.

"We're in a place where we will have conversations with all parties interested, including banks and [telephone companies], to get to a place that would benefit everyone," Anderson says.

Starting a brand from scratch and a payment network that people trust is a substantial investment, but Hughes thinks that Isis might distinguish itself by doing more than replicating a plastic card experience. While Hughes didn’t mention anything specific that Isis has in mind, there are opportunities to integrate similar store loyalty programs, checkins and other capabilities that mobile apps have already started to provide for in-store shoppers.

PayPal, Bling Nation and Other Players

While mobile phone networks and credit card companies are trying to turn your cell phone into a type of credit card, PayPal is trying to use NFC to make its online-only system viable in the physical world.

The company has partnered with Bling Nation, a Palo Alto startup that has been installing contactless payment terminals at local merchants since 2008. When users attached an NFC-enabled sticker to their phone, they could swipe to make payments and receive rewards. Previously, Bling Nation users were paying from accounts at partner banks. Since this summer, they’ve also had the option to pay using their PayPal accounts.

Boku, a company that makes online purchases easier by allowing customers to use their mobile phone numbers at checkout, has also expressed interest in entering the physical world as a payment option. In Boku’s case, online purchases are currently charged to the customer’s phone bill. How exactly the addition of physical payments would take place remains unannounced.

Other companies are focusing not only on payment, but on replacing the loyalty program cards, coupons and other cards most people carry in their wallets. Earlier this week, it was revealed that Google purchased Zetawire, a startup that held a patent application for "mobile banking, advertising, identity management, credit card and mobile coupon transaction processing," and little else.

Still, companies like Boku increasingly see your wallet as unnecessary. As Boku's co-founder Ron Hirson says: "I think us carrying around a wallet full of plastic will absolutely go away, and I think that billing methods will live inside the phone."

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